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Rental Financing 101: Mortgage & Refi Tips for New Investors (Rookie Reply)
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- [00:00]
Ashley Kerr
We're tackling some of the most common financing dilemmas that new investors face in this episode of Real Estate Rookie Reply from navigating FHA loans with inconsistent income history to deciding if sacrificing that amazing interest rate is really worth it for expansion.
- [00:19]
Tony J. Robinson
Yeah, I mean, today's questions really showcase like the true crossroads that so many new investors counter. We've got a college student with perfect credit and decent savings trying to make that first crucial move. And we also have a couple who's kind of hit their stride with one property, but they're kind of facing tough decisions about how to leverage their primary residence for growth. Plus, we'll tackle what to do when a tenant insists on plugging their Tesla into your property's dryer outlet, believe it or not.
- [00:45]
Ashley Kerr
So whether you're saving up for your first deal or really just trying to figure out how to scale your portfolio, today's episode gives you practical advice you can apply immediately.
- [00:55]
Tony J. Robinson
And honestly, what makes these situations so interesting is that there's rarely a perfect answer. So we'll walk through the pros and cons of each scenario and really help you think through the considerations that matter most.
- [01:10]
Ashley Kerr
I'm Ashley Kerr.
- [01:12]
Tony J. Robinson
And I'm Tony J. Robinson.
- [01:13]
Ashley Kerr
Welcome to the Real Estate Rookie Podcast. Today we have our first question from Ethan Tomlinson from the Bigger Pockets forums. So Ethan says hi. I am a 22 year old college student at BYU. I'm looking to house hack in Southeast Idaho. It's been a dream of mine to house hack the moment I have learned of it which was four years ago so when he was 18. I'm wondering if anyone can help with the process of getting your first house hack cost, getting pre approved for an FHA loan, who to talk to first, etc. I have two part time jobs and I have no debt. I only have to pay for groceries and gas right now so I'm able to save about $2,300 $2,500 each month after paying my living expenses each month. Here are some other things to know. My current savings are about 20k and I have 4k in a Roth. My credit score has been 750 plus for quite some time now. I have only had my £2 part time w2 jobs for about a couple months. Before then a lot of my labor was 1099 or just being paid cash. And if I remember correctly you need two years of income to get approved for an FHA loan generally. So what steps should I take to inch closer to obtaining a house hack? It's Killing me more and more not being able to start this. I definitely haven't done any deal analysis in a while with the calculators, but I used to a lot years back. Hey, so first of all this is always awesome when we get someone really young that instead of out drinking and partying at college they're mad that they're not house hacking.
- [02:54]
Tony J. Robinson
Yeah, I think definitely kudos. I'm just to be that that age and, and already be focused on this and putting money aside, it's, it's major. I don't know, I think if I were him probably where, where I would start is just understanding what my actual purchasing power is or like, like what can I actually afford. Currently you talk about how much you're able to save and what your current savings are, but we don't quite know what your income is. It is true that more job history is typically going to make it easier for you to get approved for a mortgage, but also say that there are lenders out there who won't necessarily need two years of income to get you approved. Right. If you can kind of show and prove or your income in different ways or different letters have different things that they're looking at. So I think the first thing that I would do is go talk to as many lenders from, you know, you can go to the big banks but also go talk to the small local regional banks. Honestly naca. I've talked about NACA quite a bit. We've interviewed guests who have used that loan product. I think that will be great in your situation as well. But that's where I'm starting Ash is knowing how much loan can I get approved for?
- [03:59]
Ashley Kerr
So we have a place biggerpockets.com/lenderfinder to actually get a pre approved and I think after you know your purchasing power a great next step is to talk to a real estate agent and finding an agent who helps other people house hack. I think when you talk to agents you can say how many clients have you helped in the first year get a house hack? You know asking them specifically how many not have you ever helped someone get in a house hack but see what their experiences and then ask them, ask them questions about house hacking to really get a feel if they, you know, are knowledgeable about this. Because this seems like this would be a huge advantage to you if you got an agent to not only help you find a deal to close on the deal but also could help you along the process of what would make a good house hack too. Whenever you're looking for A real estate agent, you want to understand what those things are that you actually need from the agent. So for me, I need the agent to drop the contract, do the paperwork, schedule things. I don't want to do any of that. If you're a new investor, there are so many investor friendly agents that can help you, you know, answer questions about the market. You know, they can tell you what you could actually get it for rent, but you want to make sure you're actually talking to the right person. If you're talking to an agent who primarily sells primary residence, they're probably not going to have as good of a grasp onto what places rent for in the area. They could look it up. But somebody who's actually helping investors, you know, even rent their homes, purchase them or find them, that they'll have a better understanding of what that information would look like.
- [05:43]
Tony J. Robinson
And I think once you, once you've nailed down that piece of putting your team, at least your initial team together with your agent, then it comes down to really narrowing down your, your buy box. Just because you know, you want to house hack. There's a lot of variance within that to know what type of property you'll actually end up buying. You know, are you looking for small multi family? You know, Ash and I just did an episode on why that works really well. Are you looking for just a single family home? You know, are you, if it is a single family home, do you want a two bedroom, you know, where you're living in one bedroom, renting out the other, do you want a six bedroom, you know, where you're, you're renting or you got a lot of extra space to rent, do you want a home with a basement or an adu? Like what type of property you're actually looking for I think would be the next step. But I don't think you can really answer that question to you get a better sense of that first piece, which is how much loan can I get approved for? Right? Because if say you want to buy a six bedroom house, but you only get approved to go out and buy something half that size, well now you've got a natural constraint on what your buy box could be. So identifying type of property location, what specifications do you need to make it worth your while?
- [06:55]
Ashley Kerr
And also the part two about getting your having two years of W2s for the FHA loan. My sister was able to get an FHA loan without even having a W2. She was a college student and then she got a job offer and just with her job offer letter, she was able to get pre approved. So I would go out and I would talk to lenders because maybe it's not even an FHA loan. Maybe there's another type of loan product that would be good for you. But I would not let that stop me from getting my first house hack. Is that you haven't had two full years at the of a W2 income job.
- [07:36]
Tony J. Robinson
And I think the only last thing that I'd add is, you know, obviously it's super encouraging to see Ethan as a college student so interested in real estate and I love the enthusiasm. But I think also Ethan, it's important to call out that you want to slightly temper that excitement and always kind of gut check or sanity check against the the cold hard facts of whatever deal it is you're looking at. You said you've been wanting to do house hacking for four years, which is great. But don't let that excitement pull you into into a deal that maybe doesn't make sense. So still use the calculator. You said you've used them in the past. Make sure you're using the calculators to identify does this deal actually pencil out. And don't buy something just because it seems like something, you know that gives you the warm and fuzzies.
- [08:18]
Ashley Kerr
We're going to take a quick ad break but we will be back with our next question.
- [08:25]
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- [09:02]
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- [09:47]
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- [10:18]
Ashley Kerr
Okay, welcome back Tony. What is our next question from the Bigger Pockets forums?
- [10:23]
Tony J. Robinson
All right, so this question comes from Lindsay and man, I have some pain just reading this question because it's talking about low interest rates. But I'll, I'll do my best to get through without tearing up on you guys. But it says should I refinance my 2.25% primary residence, 2.25% primary residence to a 7.5% plus DSCR to get my equity out? Now she, she adds some context here. She says I'm a new investor. Just closed on our first rental. It's a long term duplex. We want to keep trucking down our investing road but have a few barriers. The first being we retired my husband out of corporate hell in September. Yay. But going all in on my self employed business as a financial therapist means two things. One, we don't have a ton of extra income to be saving for our next investment property and two, we don't qualify for a conventional loan. We bought our first rental with the DSCR with 25% down and an interest rate of 7.5. Paid 199,500 and the monthly rent is 2150. It's a pretty good deal. Additionally, as my business is fully remote, we are moving to Costa Rica for one year all of 2026, which means we're going to rent out our primary residence. For context, our house is on a 15 year conventional loan with a 2.25% interest rate. We have about $170,000 of equity in the house but because of our employment arrangement we don't have access to a heloc. And honestly I don't know if I would Want to be super leveraged. Anyway, according to the lenders that I've spoken with, we can't do a cash out refi either. I think as we plan to rent it out for all of 2026, we could either refi into a DSCR loan. However, we will be losing our 2.25% interest rate and moving to a 7.5% rate. But that $170,000 would give us the potential to buy a few more long term multifamily. Any help is appreciated. Lot to unpack here. First 2.25%. Man, those were the days. Going to 7.5% would be a really big jump. I don't know what's your, what's your initial reaction, Ashley? Hearing, hearing this question.
- [12:34]
Ashley Kerr
Yeah, that definitely is a huge transition. And I'm trying to rack my brain for a way to get a HELOC on this property because honestly, just when the question started, that to me was the best scenario of getting a HELOC. But I think that, okay, you have 170,000. What kind of purchasing power does that give you? So is that a down payment on a property? Is that, that a all cash purchase on a property? Is that buying two properties, the market that you're investing, what could you actually use those funds for? What would that actually deploy? So I think that's kind of my first thing because my answer would change depending on that scenario too. But I think you gotta really run the numbers first to see, okay, if you pull out that 170,000, your interest rate increases to seven and a half percent. What can you do with that $170,000? So if say you purchase a property, it's going to cash flow, you know, fifteen hundred dollars a month. What does that, what is the difference in your mortgage payment that you're making every month compared to what you'd be making off the cash flow. So do they offset each other? Does the, is the cash flow more than what that new mortgage payment would be? Is it less than what it would be? And you're actually not making any more money because that payment is so much higher. So I would definitely lay out the options and run the math on each scenario of what you could do with that 170,000. And if you had this new mortgage payment at the new rate on the property.
- [14:18]
Tony J. Robinson
Yeah, I think you read my mind. For me, it will come down to the numbers as well, right? Not only the difference in the, the 2.25% rate and the 7.5% rate, but also what kind of return do you expect to get on that $170,000 that you're able to tap into? And if you're only going to get a, a low single digit return? Well, it doesn't make sense to actually go out there and deploy that capital. Now if you're doing it for other reasons, right, but it sounds like you're mostly focused on cash flow. But if you're doing it because you want the tax benefits, or maybe you're doing it because you just want the appreciation, I guess that's a slightly different play. But if it's, if it's truly the cash flow that you're focused on, you got to look at both what are you losing on the primary and then what are you gaining from return perspective by deploying that 170,000? And you know, to Ashley's point, it's like how many properties are you planning to buy? You know, does that get you to one deals? Like it's you to two deals, that get you to three deals. And how does that cash flow kind of stack up?
- [15:13]
Ashley Kerr
I got an idea that came to me while you're talking. They're moving to Costa Rica. They're going to rent it out for a year. When they come back, are they going to move back into their primary residence? Okay, so let's say that they are. I don't think it says that, does it?
- [15:28]
Tony J. Robinson
It doesn't say that they are. Yeah.
- [15:29]
Ashley Kerr
Okay, so for this scenario, let's assume that they're going to rent it out for one year and then they're moving back and it's going to be their primary residence. Again, I would look at going and go ahead and do the DSCR loan, but look for something that has a very, very low fee. So what is going to have very minimal closing costs? Okay, so shop around, talk to different lenders, talk to different brokers. So they're going to make you prepay a lot of expenses up front so those things won't change. But compare loan products and which one actually has the lowest fees towards it. Okay, so you go ahead and you get the DSCR loan, you pull out that 170,000, you, you deploy it into something else. Then when you move back and it's now your primary residence again, I would go to a small local bank, I would use one of their no closing cost loans and I would refinance back into a primary residence. You're not going to get that 2.25% interest rate, but it will at least decrease it from the interest rate you were getting. What was it seven point something, you'll at least get a better rate than that with it being your primary residence. Again. So that is not best case scenario. But that is another option too as to where you're minimizing your closing costs but you actually go and refinance twice. So but that's also assuming that rates don't increase because once you move back from Costa Rica rates could actually be higher. Now you're stuck with that payment and that interest rate. So it's just one other thing to look at as to if that is an option. You could also see if there was a variable rate so an ARM mortgage available where you typically you'll get a lower interest rate and but it's only fixed for five, seven or ten years and you could go ahead and do that right now and then go ahead and plan to refinance in the future back into a primary residence loan. So those are a couple options, but I would say I am assuming that this person has talked to one lender. If you, if that is the case, go and talk to other lenders, go and see what other products, tell them what you are doing and let them tell you what is available. You could get a commercial mortgage line of credit on the property potentially if you're telling them that this is now going to be a rental. I have three rentals that have lines of credit on them that I can use to deploy to make purchases, things like that. So if you're talking to one lender and maybe it's the person who already has a mortgage on your bank or that you've worked with, go to even the commercial side of lending and see what you can do there. I think there's a lot more options available, loan products or loan options, but just literally write it out in an email if you want and copy and paste it to five different lenders in your area, you can go to biggerpockets.com lenderfinder you can search small local banks in your area, credit unions, tell them what you're trying to do and see what people come back with as ideas for you.
- [18:53]
Tony J. Robinson
And you bring up a really good point too of of them going back after this Costa Rica thing. Obviously totally agree with you too on like talking to more lenders. But if the challenge right now is that they just don't have enough, you know, employment history per se, then I wonder if they just continue to focus on their small business while they're in Costa rica. They'll have 2025 and then they'll have all of 2026. So two solid years of them being self employed, which for a lot of lenders is like that threshold that they're looking for. So I wonder if you come back to Ashley's point, you move back into your primary residence, you know, in 2027 and then now are you in a better position to maybe tap into some of that, that equity via heloc? So I don't know if I would just like jump the gun and give up this juicy 2.25% interest rate just for the sake of scaling quickly. I would really try and make sure, and to Ashley's point, that you're exhausting all of your options before you because it's going to be hard. You'll virtually never be able to get that back.
- [19:51]
Ashley Kerr
And instead of maybe taking on another property, maybe you focus on paying off that other property, their other investment property that has the DSCR loan on it already. And maybe it's, you know, you're gonna pay that property off in the next two years instead of going and purchasing another property. That's always something to look at.
- [20:13]
Tony J. Robinson
All right, guys, we're going to jump to our last question, but we're going to take a quick break before we do. But while we're gone, if you haven't yet, please be sure to subscribe to the real estate rookie YouTube channel. You can find us at Real estate rookie on YouTube. We'll be right back with more after this quick break.
- [20:30]
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- [21:06]
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- [21:43]
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- [22:11]
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- [23:34]
Ashley Kerr
Okay, let's jump back in with our last question today. So this question is I have one of the units in my multifamily rented by the room by two tenants and the electric bills quadrupled compared to when I lived there. Turns out one of the tenants started charging his Tesla from the dryer outlet when I found out. We agreed that he pay $50 extra each month. The last couple of months he stopped paying that 50. And the bill continued to climb up $500 last month. This property is in Massachusetts. I can't figure out why it's so enormous. As both tenants are rarely home, I have tried to pop in to see if appliances are left on nothing. So I clearly told him to stop charging his Tesla and that's the only thing I can think of that drives up the bill. Last night, the other tenant texted me a picture of the Tesla still being charged. The lease does not say anything about electric vehicles, but has a clause about wasting utilities. The heat is gas, so that's separate. The Tesla tenant has not responded to my messages, and I am guessing he's going to continue to charge his car because it's very convenient for him, in his words. Otherwise he is a good tenant. Any advice on how you'd address it? First of all, Tony, you have a Tesla. Is Your electric bill $500 per month.
- [25:00]
Tony J. Robinson
Only during the summer because you run the AC so much, but never because of the charging for the car.
- [25:04]
Ashley Kerr
So let me ask you, like, how much would you say that you your electric cost each month for your Tesla?
- [25:12]
Tony J. Robinson
It's honestly pretty negligible. Like if I compare our electric bill before the Tesla and after, it's a very negligible increase. So I'm not entirely sure that it's the Tesla.
- [25:25]
Ashley Kerr
Maybe does it have like this one? Could be because they're putting in the dryer outlet where like the actual Tesla chargers are more energy efficient. Maybe, I don't know.
- [25:36]
Tony J. Robinson
Highly possible, right? Because we have like the actual charger at our house. So it could be that they're just doing like the, the wall plug in and maybe it's, it's eating up more juice. So I can't say with the high degree of certainty that it, it will be the single thing that's this kind of spike in the bill. So I think two things come to mind for me for like first I would call the electric company and ask them if they can send someone out just to see if, if they notice anything that might be causing this to say, like, hey, something is off here, you know, to, to four extra electric bill. Mine definitely did not do that, you know, so something else must be going on. So I would ask the electric company to come out, have them take a look. I would have an electrician come out, have them take a look, and just start trying to, to root cause what's actually going on here. So that's the first thing, get some professionals out there to give you their opinion. But second, and this part Is. Is just kind of weird. But this person says that the last couple of months, he stopped paying that $50. Like, he didn't say why. It seems like the tenant just decided, I'm not going to pay this anymore, but I'm still going to charge my car. I feel like that's also an issue that needs to be addressed because, you know, Ash and I talk a lot about setting expectations for the people that come into your properties. And right now you are setting the expectation that the tenant, even though you've agreed to something, can stop doing that on their own accord. And that is not. That is a slippery slope, because right now it's the Tesla charging. What if it's your rent next month? And he's like, you know, I don't really feel like paying rent next month, you know, and it's just ignoring your messages. So I think there's two things you need to handle. Get some professionals out there to assess the electrical issue, but then also really reset expectations with your tenant around. Hey, we came to an agreement. I need you to honor this agreement.
- [27:27]
Ashley Kerr
There's one other thing that stood out to me, too, is the. I'm stopping by to see if appliances are left on. So, I mean, it. Does that mean you're looking in the windows, you're walking around the house to see if the AC is running and no one's home. So I wouldn't. I wouldn't do that. I wouldn't recommend that. Plus, you don't want to. You have to be that landlord that has to constantly go to the property. And I think calling out a professional that can help you assess the situation is great advice from Tony as to how you could figure out why this is. I wonder. There's got to be, like, some kind of monitoring, some, you know, thing with all of the home gadgets and things like that. Like, they have the things that go under the sink that, like, if you have a water leak, you know, they'll set off an alarm and you can get a notification on your phone that there's water leaking. I wonder if there's like, something like that where when there's a surge of electricity being used, you could, like, hook something up to your electric panel to get notified that right now there's more usage than, you know, the night before this, there's something like, yeah, I wonder if there's any technology. So if you're watching this, you're on YouTube. Please leave a comment below. If you have a good gadget or tech device that could actually help assist in this situation for the electrical issues. Well, thanks so much for listening to this episode of Rookie Reply. I'm Ashley, and he's Tony, and we'll see you guys on the next episode.